Business Law Prof Blog

You'll never guess what today's blog post is about

Maybe this is a time when other news has overtaken corporate governance disputes, but governance disputes are we do here, so.

Also, what obviously has my attention right now are two issues: the upcoming Tesla vote on Musk’s pay and redomestication to Texas, and the proposed amendments to the DGCL.  This blog post is a couple of quick notes about both.

On the Tesla vote.

I previously blogged that a good argument could be made that restoring Musk’s pay package now offers no economic benefit to Tesla, and therefore would fall into the legal category of waste – which, under current doctrine (even if subject to challenge in the modern era) would require unanimous shareholder approval.  At the time, I offered the reservation that, from a practical perspective, waste would be difficult to litigate (and yes, if shareholders vote in favor, the effect of the vote will absolutely be litigated, by Tornetta, the current plaintiff, if no one else).  That’s because a court might be hesitant to hold that major institutional shareholders – with a fiduciary duty to maximize value for their beneficiaries – would cast an economically irrational vote.  From there, the court might reason backward and conclude that it couldn’t possibly be economic waste.

I also offered a rejoinder – namely, institutions might vote to approve the package because they were “coerced,” perhaps due to Musk’s threats to develop AI in his private businesses rather than Tesla (which he is using Tesla data to do).  But in my post, I treated that as a difficult argument to make, given that there was no suggestion of a threat in the proxy; the plaintiff would have to reach back to those earlier comments by Musk and ask a court to draw the inference that they were still influencing shareholders in June.

And then, of course, Musk couldn’t quite stay off ex-Twitter and he reaffirmed the threat, which Tesla was then forced to file as proxy solicitation material.  He also hinted at it during an earnings call before stopping himself, which was also filed as solicitation material, and Musk boosters are making the point pretty explicitly on social media:

And all the reporting mentions the threat to develop AI outside of Tesla, so, now, it’s much easier for the plaintiff to argue that any shareholder vote in favor of Musk’s pay is coerced, and therefore without ratifying effect.  It works in tandem with the waste argument, even though they’re also alternatives – why did shareholders vote for waste? Coercion.  How do we know it was coercive?  Because of the lack of (legitimate) economic value for Tesla.  Etc.

And then there’s Texas. I think it would be difficult, legally, for shareholders to challenge reincorporation to Texas as somehow damaging to their rights; leaving aside the uncertain status of TripAdvisor, Texas’s law is similar to Delaware’s, and so formally, reincorporation doesn’t present the same specter of self-dealing.  (I’m not saying no one’s gonna try, who knows what those wacky shareholders might do).  And Tornetta’s legal team probably is going to stay focused on the pay package rather than the Texas issue (except to the extent they’re worried a reincorporation in Texas means a new lawsuit will be filed there that’s res judicata in Delaware).

Nonetheless, the attempt at reincorporation now adds color to the pay dispute.  Because yes, of course, Tesla’s proxy statement makes clear, the states have a lot of formal similarities in their laws.  And academics debate whether there’s any real benefit to incorporating in Delaware, and it might be reasonable for a startup entrepreneur setting up a new company headquartered in Texas to choose Texas as its chartering state.  But Tesla is not a new company – it’s an established public company that has already been operating according to (well, not according to) Delaware law for a while, now contemplating an expensive switch – involving special committee payments, advisors, hours, and expert analysis, not to mention vote whipping – for benefits that even the company itself claims largely are about branding. 

Even then, if Tesla were doing this on a clear day, then, you know, shrug. 

But it’s not a clear day, it’s in the wake of two high profile losses for Tesla – the Tornetta decision, and the earlier settlement over director pay – and one personal one for Musk, namely the Twitter case (which he dropped, because he knew he would lose), and comes only after Musk tweeted his declaration that Tesla would reincorporate in Texas, reincorporated his other companies out of Delaware, and tweeted that he would not acquire Delaware companies.  In the midst of several tweets about Delaware’s perfidy, he even urged other companies to leave.  Given that context – not to mention Chancellor McCormick’s previous findings regarding the Board’s deference to Musk – there is certainly cause to doubt that the Board, or the special committee, was entirely forthcoming about its reasons, and acting entirely in good faith, when insisting that Tesla should move to Texas right now because Tesla is “all-in on Texas,” and not at all acting on Musk’s personal ire.  Which is apparently what ISS said in its proxy recommendation – I don’t have access to the report itself, but it noted that, while the move itself was unobjectionable, “the process undertaken by the board to reach a decision . . . does leave something to be desired.”  And certainly outside observers read the move as an attempt to free the board to give Musk as much compensation as he wants.

And if that’s right – that no matter how thorough the proxy statement is about describing the Board’s reasoning and the special committee’s diligence, it’s impossible to escape the doubts raised by the context in which this is occurring – then even if the Texas proposal is not directly challenged by Tornetta, the fact of its existence supports the argument that all of the Board – including the special committee – is beholden to Musk.  Therefore, none of the Board’s actions – including the recommendation that the pay package be restored – can be trusted.

Point being, it adds heft to any legal challenges to the pay vote.

BUT!!  Given that it is, frankly, politically awkward for one state – Delaware – to claim there’s anything wrong with incorporating in another state, I wouldn’t be surprised if Chancellor McCormick didn’t want to engage with the Texas issue directly.  But it could still affect her thinking (and the thinking of the Delaware Supreme Court on appeal).

On Proposed Amendments to Delaware Law

Prior posts in reverse chronological order here, here, here, and here.

VC Laster has been active on LinkedIn, highlighting various ambiguities in the proposed DGCL 122(18).  But he’s doing more than poasting; in Columbia Pipeline Merger Group Litigation and in Wagner v. BRP Group, Inc., his legal reasoning reads as a direct challenge to the synopsis to those amendments, by demonstrating the fiduciary “outs” they propose are ephemeral.

For example, the DGCL 122(18) synopsis says:

even the enforceability of a claim for money damages for breach of the covenant may be subject to equitable review, and related equitable limitations, if the making or performance of the contract constitutes a breach of fiduciary duty…

New § 122(18) does not relieve any directors, officers or stockholders of any fiduciary duties they owe to the corporation or its stockholders, including … with respect to deciding whether to perform, or cause the corporation to perform, or to breach, the contract, whether in connection with their management of the corporation’s business and affairs in the ordinary course or their approval of extraordinary transactions, such as a sale of the corporation

However, in both Columbia Pipeline and BRP, Laster extensively discusses how fiduciary obligations cannot require corporations to break contracts, or free them of consequences (including damages or equitable remedies) when they do so.  The synopsis suggests contracts might be set aside when directors’ actions are reviewed under “enhanced scrutiny”; Laster takes that one on as well in both cases, concluding that it’s a misreading of Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34 (Del. 1994).

Additionally, the synopsis says:

New § 122(18) does not relieve any directors, officers or stockholders of any fiduciary duties they owe to the corporation or its stockholders, including with respect to deciding to cause the corporation to enter into a contract with a stockholder or beneficial owner of stock….

In BRP, Laster highlights that fiduciary duties are only owed to current – not future – shareholders.  Which means, if fiduciary obligations are the only thing that protects shareholders when boards adopt these contracts, anyone who was not a shareholder at the time of contracting will have no claim.  In practical effect, a contract adopted pre-IPO could not be challenged by public stockholders.

Additionally, in Moelis, Laster held that the improper provisions of a stockholder agreement might be replicated via a preferred share issuance, though reserving the question just how far preferred shares might go.  In BRP, he elaborated on that point, arguing that some restrictions on board authority must be contained in the charter “proper,” and cannot even be included in preferred shares.  As he put it:

A counterparty also would not be able to secure covenants that bind the board through a preferred stock issuance. A certificate of designations can set forth “the designations and the powers, preferences and rights, and the qualifications, limitations or restrictions” of the class or series of stock that the board authorizes using blank check authority. 8 Del. C. § 102(a)(4). That list of features does not include imposing covenants on the board. To constrain or mandate action by the board under Section 141(a) requires a charter provision directed to the board, not a charter provision limited to the “the designations and the powers, preferences and rights, and the qualifications, limitations or restrictions” of a class or series of shares.  That type of provision could appear in the original charter. It also could be implemented through charter amendment duly approved under Section 242, or through a merger or comparable transaction where the DGCL authorizes amendments to the charter of the surviving corporation. A covenant binding the board could not be imposed through a certificate of designations. Under current law, it also cannot be imposed through a governance agreement.

Proposed DGCL 122(18) would authorize contracts that:

covenant that the corporation or one or more persons or bodies will take, or refrain from taking, actions specified in the contract

The implication being, DGCL 122(18) would authorize contracts that go further than what could be accomplished in a preferred share issuance.  Assuming that’s right, it just further demonstrates how DGCL 122(18) would more than authorize governance contracts, but actually encourage a shift of governance from the corporate form and into personal contracts. 

 

Artificial Intelligence and Memorial Day

Over the years, I have written a number of blog posts here on Memorial Day that honor those who sacrificed their lives for us through national military service.  You can find the last few here, here, and here.  When practicable, I work in something about business law in those posts.

This year, as I contemplated what to write, I also was mired in grading and other teaching-related work.  On my mind throughout was generative artificial intelligence, a hot topic in law school circles and throughout education (and, of course, elsewhere, too).  The full range of benefits and burdens of generative artificial intelligence still remain to be discovered.

I wondered what a generative artificial intelligence tool would draft up as a blog post for Memorial Day.  Then, I thought, why wonder?  Why not give it a whirl?  So, I asked Google Gemini to "[w]rite a short blog post that combines business law with Memorial Day."  Set forth below is what I got back.

Honoring Heroes, Respecting Rights: Business Law and Memorial Day

Memorial Day is a time to remember the brave men and women who died serving our country. But for businesses, it also presents some legal considerations. Here's a quick look at how business law intersects with this solemn holiday.

• • Employee Rights: Federal law doesn't mandate paid time off for Memorial Day. However, some states have their own laws, and many companies offer paid holidays as part of employee contracts. Businesses must ensure they're following all applicable laws and agreements regarding employee pay and scheduling for the holiday.

  • Business Closings: If your business plans to close for Memorial Day, it's crucial to communicate this clearly to employees and customers well in advance. This helps avoid confusion and ensures smooth operations upon reopening.

  • Sales and Promotions: While Memorial Day weekend often unofficially kicks off the summer shopping season, it's important to be mindful of the true meaning of the holiday. Avoid promotions or marketing that appears disrespectful to the somber occasion.

  • Community Engagement: Businesses can choose to honor veterans and fallen soldiers by participating in local Memorial Day events or supporting veterans' charities. This demonstrates respect for the holiday's purpose while fostering positive community relations.

By understanding these legal aspects, businesses can ensure a respectful and compliant approach to Memorial Day, allowing them to honor our heroes while adhering to the law.

Honestly, it's not too far off from some of what I have posted in the past.  I am not sure whether to be sad or happy about that.  But now I no longer have to wonder . . . .

Regardless, I do want to continue to pay respect to those who have died in military service to our country.  May they rest in eternal peace knowing that their lives and work are remembered and appreciated on this Memorial Day and every Memorial Day.

What is the value of the corporate charter, a reprise

I previously posted about the proposed changes to Delaware law, the latest version of which would allow shareholder agreements insofar as they don’t go further than what a charter – including a preferred share issuance – could allow (except for the exemption from DGCL 115). 

One thing I should have mentioned, though, highlighted by Marcel Kahan and Edward Rock here, is that the difference between a share issuance/charter provision, and a contract, is highly salient for purposes of an exchange listing.  Exchanges define control in terms of voting power, not contractual power; moreover, they prohibit corporate actions that would limit shareholder voting power after listing; dual class shares are fine, they just need to be established prior to listing rather than taking away shareholder voting power mid-stream.  What they don’t address, though, is power through shareholder agreements.  Which means, if the DGCL is amended as proposed, a public company could hand over additional governance powers to particular shareholders through contract, without affecting the formal voting power of existing shareholders, and very possibly remain compliant with Exchange rules.

To put it concretely: Elon Musk has vocally demanded 25% voting power of Tesla so that he can control the development of AI. He’s also admitted he can’t get that through a switch to dual-class shares, because of the listing rules.  If the DGCL changes go through, though, there is no reason the board couldn’t “contract” with him to give him outsized influence over Tesla’s governance, regardless of how existing shareholders vote. 

And that leads to the elephant in the room.  Delaware law is all about shareholder wealth – full stop.  My paper on Twitter v. Musk (which is now published and the final version is on SSRN, by the way /plug) is all about the fallacy of relying on Delaware law to advance any value other than shareholder wealth maximization.  But corporate governance does, in fact, matter to the rest of us; it matters whether single individuals wield nearly unchecked power over how corporations behave. 

Back in the 1930s, Congress actually legislated to discourage the use of holding companies, precisely in order to limit the power that individuals could wield over large corporate structures with only a small slice of equity interest.

More recently, as I talk about in my paper Beyond Internal and External, the FTC settled with Mark Zuckerberg to prevent him from exercising his rights as a shareholder to interfere with Facebook’s compliance with a privacy settlement.  Zuckerberg’s unchecked power in his shareholder capacity threatened Facebook’s ability to comply with the law.

So these proposed DGCL changes have very far reaching social consequences that simply have not been explored by Delaware lawmakers, let alone The Rest of Society.

Anyhoo, links to a recent news article here and a collection of Chancery Daily links here.

 

 

Playtika

Earlier this month, VC Glasscock issued an opinion in Kormos v. Playtika Holding UK II, where he dismissed breach of fiduciary duty claims against the Chair/CEO and CFO of a controlled company.  The opinion made reference to an earlier bench ruling where he sustained claims against the company’s controlling shareholder, Giant/Alpha, which is what alerted me to the bench ruling – which issued in January – in the first place.  And that bench ruling is actually what has my attention.

Playtika Holding Corp is a publicly traded company with a controlling shareholder, Playtika Holding UK II Limited (“Holding”).  Holding is a wholly-owned subsidiary of Giant/Alpha.  In 2021, Giant/Alpha faced a liquidity crisis and desperately needed to raise cash, which it sought to do by selling Holding’s Playtika stock, potentially in connection with a sale of the entire company.  But the process was rushed and messy, with Playtika itself and Giant/Alpha running separate inquiries; eventually, Giant/Alpha instructed Playtika’s board to stop talking to potential buyers, but to instead cause Playtika to institute a self-tender for its own stock.  SEC rules require that tender offers treat all shares of a class equally, which meant that the public shareholders – as well as Giant/Alpha – were able to tender in to the offer.  But, with Giant/Alpha tendering, it could receive cash back from Playtika which would then solve its liquidity problems.

Plaintiffs, the public holders of Playtika, alleged that this was a conflicted transaction that was not in Playtika’s best interests, and was therefore subject to entire fairness review (though they did not claim the price paid for the shares was unfair).

There’s just one problem with that argument, doctrinally: ever since Sinclair Oil Corp. v. Levien, 280 A.2d 717 (Del. 1971), we know that in order to be a conflicted transaction, implicating the duty of loyalty, the controller must receive a nonratable benefit, i.e., some benefit not available to the other stockholders – and arguably, it has to be a benefit that specifically comes at the minority’s expense.  In Sinclair itself, for example, the controlling shareholder caused the company to pay out massive dividends that allegedly robbed the company of the ability to take advantage of alternative opportunities, and it did so for its own private reasons.  Still, the dividend payments weren’t a conflict transaction – and were therefore subject only to business judgment review – because all shareholders got the same dividends, controller and noncontrollers alike.  The controlling shareholder did not receive a special benefit at the expense of the minority (As the Delaware Supreme Court put it, “a proportionate share of this money was received by the minority shareholders of Sinven. Sinclair received nothing from Sinven to the exclusion of its minority stockholders. As such, these dividends were not self-dealing”).

Similarly, in Playtika, the self-tender may have been motivated by Giant/Alpha’s need for cash, but all shareholders could participate in the tender on equal terms, meaning, it wasn’t a conflict transaction, and was therefore subject only to business judgment review.

Except! 

There was a twist.

Giant/Alpha did not want to risk tendering so many shares that it actually lost control of Playtika.  So, it negotiated a provision whereby Playtika would have to announce the number of shares tendered publicly, which would allow Giant/Alpha to keep close tabs on the status of the offer.  Giant/Alpha could also withdraw shares that it previously tendered – which I gather was a negotiated term of the agreement, but also, by the way, required under SEC rules for all tendering shareholders.  So, because Giant/Alpha was able to monitor the shares tendered, and withdraw its own shares, it could adjust its tender and maintain control of the company.

Those provisions, according to VC Glasscock – as he explained in his bench ruling in January, and again in his recent opinion earlier this month, were a nonratable benefit to Giant/Alpha, because they uniquely allowed Giant/Alpha to maintain control, which was not something the minority could share.  And that was enough to transform the Playtika self-tender into a conflict transaction, subject to entire fairness review.

So here’s the thing.

Treating the right to monitor the number of public shares tendered as a nonratable benefit to Giant/Alpha – let alone one that comes at the expense of minority shareholders – strikes me as a bit of a reach.  SEC rules require that tendering shareholders be able to withdraw before the tender offer closes; that wasn’t a benefit unique to Giant/Alpha.  And if Playtika publicly announced how many shares had been tendered, that meant everyone could see what the status was.   

That said, the whole scenario was obviously hinky from the get-go.  There was an awful initial search for alternative transactions; the self-tender itself was designed to benefit Giant/Alpha, and you can see why a judge might be looking for a reason to at least scrutinize the arrangement more closely.  Hence, a nonratable benefit was identified – Giant/Alpha’s ability to modulate the number of shares it tendered. 

And it matters because, as I’ve written two papers about, and also blogged repeatedly (here, here, here, here, here, here, here, here, here, here, here, here, here, and here), the more that Delaware makes it very easy to insulate deals from review unless they involve a controlling shareholder conflict, the more that courts are motivated to identify a controlling shareholder conflict in order to give themselves the opportunity to review problematic transactions.  As my papers discuss, that’s often exhibited in the definition of what it means to be a controlling shareholder in the first place – but, as we can also see here, it exhibits itself in the definition of conflict, as well.

Anyway, that kind of morass is exactly why the Delaware Supreme Court granted interlocutory review of TripAdvisor, i.e., to address the definition of a conflict transaction.  But TripAdvisor involves a reincorporation from Delaware to Nevada; I have no idea whether the court will address just that scenario – which obviously involves questions of comity not present for other kinds of potential conflicts – or whether it will take a broader view of the problem.

Celebrating Law Leadership!

I have written in the past about the intersections of leadership and law, including business law.  See, for example,  here, here, here, here, and here.  And I was privileged to be the Interim Director, for over three years, of the institute for Professional Leadership at The University of Tennessee College of Law.  I find there is such a strong connection between leadership and business law teaching and practice . . . .

We are celebrating the tenth anniversary of the Institute for Professional Leadership this fall.  The celebration, which will take place on Thursday, October 24 and Friday, October 25, will include a gala dinner and a symposium featuring workshops, a call-for-papers panel, and a series of expert panels.  The "save the date" notice is included above.  I hope you will consider responding to the forthcoming call for proposals and papers.  But regardless, I hope you will consider attending. Feel free to reach out to me with any questions.

What is the Value of the Corporate Charter?

A few weeks ago, I blogged about the proposed amendments to the DGCL, and the questions they raised.  Well, I wasn’t the only one who had concerns, and so, now, there are new amendments to the amendments (which The Chancery Daily has posted here).  And once again, I just got these last night and I read quickly (in the middle of end-of-semester grading) so I reserve the right to be completely wrong, but, here is my quick reaction.

As I explained in my prior post , many of the original amendments were intended as a response to VC Laster’s decision in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co.  Moelis struck down a shareholder agreement that functionally conveyed management power on a particular stockholder, by giving him veto power over most board decisions.  VC Laster held that a board’s authority can only be cabined to such a degree in the charter, including through a preferred share issuance – and he also suggested that there may be some outer limits on how far even a charter provision could go in restricting board authority.

The original proposed DGCL amendments would have overruled Moelis in both respects.  They would have authorized stockholder agreements that usurped board authority and would not have placed any limits on the degree of authority that could be usurped.  The latter point struck me as particularly important, because traditionally, the corporate form is defined by its board-centric model.  If that can be contractually avoided, does the corporate form have any value at all?

The new amendments are a little different, in that they do not permit contracts that would confer governance powers beyond what could be included in the charter, or would be contrary to Delaware law.  In other words, if there are certain core powers that must remain with the board and can’t be visited in someone else via the charter, then, these amendments to the amendments would not allow those powers to be transferred via stockholder contracts.  The new language provides:

no provision of such contract shall be enforceable against the corporation to the extent such contract provision is contrary to the certificate of incorporation or would be contrary to the laws of this State … if included in the certificate of incorporation.

But also, in determining what these “core” board powers are, courts can’t rely on the fact that the power is one that is statutorily conferred on the board.  As the amendments put it, “a restriction, prohibition or covenant in any such contract that relates to any specified action shall not be deemed contrary to the laws of this State or the certificate of incorporation by reason of a provision of this title or the certificate of incorporation that authorizes or empowers the board of directors (or any one or more directors) to take such action.”

Now, the first thing that leaps out at me is how these new amendments interact with VC Laster’s decision in McRitchie v. Zuckerberg.  There, Laster held that the directors of a Delaware corporation have a duty to maximize the value of the equity, and do not have a duty to maximize the value of a diversified portfolio. (I blogged about the case when the complaint was first filed).  But Laster went on to hold that corporations could adopt charter provisions that would change directors’ fiduciary duties, so that they are obligated to consider diversified shareholders.   That’s contestable; Steve Bainbridge, for example, has suggested that Delaware corporations cannot by private ordering depart from shareholder wealth maximization and I personally would ask what’s the difference between Laster’s proposal and a charter provision that waives the duty of loyalty – which has long been assumed to be unwaivable, except as otherwise statutorily provided (like, opportunity waivers). 

But if Laster is right, then, of course, that represents a very broad view of how far charters can go to alter the board’s authority, which would also mean that stockholder agreements, under the amended proposed amendments, could go very far in altering board authority. 

Which then raises the question: Is there value to requiring that restrictions on board authority be placed in the charter rather than a separate shareholder agreement?

One obvious value is transparency; at least if the company is not subject to SEC reporting, shareholder agreements may not be available to the public or even to other shareholders.  Another value may concern the ease with which an agreement versus a charter could be amended, though I still think that if you conferred special rights to preferred shareholders, you could also confer the right to vote on amendments to those rights to the same preferred shareholders, which would make ease of amendment roughly equivalent.

Another value, though, concerns choice of law.  As I previously blogged, shareholder agreements are subject to ordinary choice of law principles; charter provisions and preferred share terms are subject to the internal affairs doctrine.  (Read my paper addressing this!)

The comments to the amendments to the amendments now discuss choice of law, but I don’t think they change the landscape.  The comments say:

Notwithstanding any choice of law provision in the contract, the reference in the last sentence of § 122(18) to the law “governing” the contract shall be deemed to refer to the laws of this State if and to the extent choice of law principles (such as the internal affairs doctrine) so require.

In other words, it’ll be another state’s law if choice of law principles so require, which, for stockholder agreements, they often do.

But further muddying the waters is this:  The new amendments say that stockholder contracts can’t go beyond what a charter amendment would permit except with respect to DGCL §115, which can be waived in a stockholder contract.

DGCL §115 requires that a Delaware forum be available for claims that “(i) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which this title confers jurisdiction upon the Court of Chancery.”

So, as I understand it, let’s say a stockholder agreement conferred extraordinary governance powers on a single stockholder.  Let’s say those powers arguably made the stockholder a “controller” subject to fiduciary obligations.  The contract could also provide that claims against the stockholder for breach of fiduciary duty must be brought in an arbitral or non-Delaware forum.  Presumably, this would include derivative claims – a shareholder would sue derivatively claiming self-dealing by a controller, the corporation would be bound by the forum selection clause, and so, the claim would be heard outside of Delaware.

I also assume that disputes regarding compliance with, or even the interpretation of, a stockholder agreement could be heard in a non-Delaware forum.  So, if someone wanted to claim that a particular stockholder agreement was unenforceable because it conferred power on a stockholder that went beyond what Delaware law permits, and it turned out that the agreement selected another state’s courts as the forum for disputes, that argument – that Delaware law does not permit delegation of such-and-such power – would not be heard in a Delaware court.

As far as I can tell, this provides an incentive for stockholders to enter into these agreements – even if they have hard control over the board and don’t really need them – because it allows them to opt out of DGCL 115, and possibly even the statutory limits on the agreements themselves, which will no longer be policed in Delaware.

Well, I have no idea how this ends but, I gotta tell you, all this drama fascinated my corpgov seminar students, so I suppose I will have much to discuss with my classes next year.

ESG Greenwashing

ESG greenwashing has been getting attention among legal academics.  In Rainbow-Washing, 15 Ne. U. L. Rev. 285 (2023), LMU Law's John Rice explores the

increasingly common, but destructive, practice in which corporations make public-facing statements espousing their support of the LGBTQIA+ community . . . to draw in and retain consumers, investors, employees, and public support, but then either fail to fulfill the promises implicit in those statements or act in contravention to them. 

My own forthcoming article in the University of Pennsylvania Journal of Business Law, presented at the November 2023 ILEP-Penn Carey Law symposium honoring Jill Fisch, mentions the increasing notoriety of ESG greenwashing and cites to John's article.

Last week, UVA Law Professor Naomi Cahn called out ESG greenwashing in Forbes, citing to a study to be published in the Journal of Accounting Research that finds "firms’ ESG rhetoric may not match their reality."  She suggests that "a meaningful analysis of a firm’s ESG commitment requires much further digging, and ultimately it requires meaningful oversight from outside the ESG community on what should be disclosed and the accuracy of the reports."  The article references a forthcoming book coauthored by Cahn, June Carbone (Minnesota Law) ,and Nancy Levit (UMKC Law) and quotes Minnesota Law Professor Claire Hill.  (Hat tip to Claire for leading me to this Forbes piece.)  It's a solidly good read.  I added a citation to it in my forthcoming article.

I suspect more will be done in this space academically and practically as ESG continues to occupy the minds of legal academics, lawyers, and business principals.  I will be continuing to work in this area, focusing next on corporate compliance issues.  Stay tuned for news on that project (and for a notification about the publication of my forthcoming University of Pennsylvania Journal of Business Law article referenced above).

2024 Corporate & Securities Litigation Workshop

Corporate & Securities Litigation Workshop: 

Call for Papers 

UCLA School of Law, in partnership with the University of Illinois College of Law, University of Richmond School of Law, and Vanderbilt Law School invites submissions for the Eleventh Annual Workshop for Corporate & Securities Litigation. This workshop will be held on September 20-21, 2024 in Los Angeles, California. 

Overview 

This annual workshop brings together scholars focused on corporate and securities litigation to present their scholarly works. Papers addressing any aspect of corporate and securities litigation or enforcement are eligible, including securities class actions, fiduciary duty litigation, and SEC enforcement actions. We welcome scholars working in a variety of methodologies, as well as both completed papers and works-in-progress at any stage. Authors whose papers are selected will be invited to present their work at a workshop hosted by UCLA School of Law. Participants will pay for their own travel, lodging, and other expenses. 

Submissions 

If you are interested in participating, please send the paper you would like to present, or an abstract of the paper, to [email protected] by Friday, June 7, 2024 Please include your name, current position, and contact information in the e-mail accompanying the submission. Authors of accepted papers will be notified in early July. 

Questions 

Any questions concerning the workshop should be directed to the organizers: Jim Park ([email protected]), Jessica Erickson ([email protected]), Amanda Rose ([email protected]), and Verity Winship ([email protected]). 

Hu, Malenko, and Zytnick on Proxy Advice

I very much enjoyed Edwin Hu, Nadya Malenko, and Jonathon Zytnick’s new paper, Custom Proxy Voting Advice.   They find that most institutional investors who buy proxy voting advice from ISS and Glass Lewis don’t use their benchmark recommendations, but instead create a tailored set of preferences and get recommendations that are based on those preferences.  Then, in particular cases, they may depart from those recs and vote another way – which in fact appears to happen quite a bit for shareholders who use customized recommendations, because, the authors speculate, the customized recommendations free up attention from less contentious votes, and permit shareholders to focus on the more contentious ones.

The point is important because, first, it may mean that headlines like “ISS recommends XXX” may be less meaningful than we think, because the benchmark recommendation may not be what many clients receive.  And second, these findings continue to demonstrate the folly of the perennial corporate complaints that proxy advisors have too much power and/or shareholders “robovote” in response to proxy advisor recommendations.   The real complaint is that shareholders have too much power and too many preferences, and if that’s the problem – well, management should take it up with them.

The final thing to note is that much of the differential comes, unsurprisingly, environmental/social proposals.  Which makes me want to draw attention to this paper by Roni Michaely, Guillem Ordonez-Calafi, and Silvina Rubio, Mutual Funds’ Strategic Voting on Environmental and Social Issues.  They find that ESG-themed mutual funds within larger mainstream families engage in a subtle form of greenwashing, whereby funds within larger families tend to vote for the E/S proposals when the proposals are very likely to pass, or very likely not to pass – and they deviate and vote with the family for the closer votes.  So they vote E/S more than regular-themed funds, but only when those votes won’t make a difference in outcome.  Which is consistent, I think, with Hu, Malenko, and Zytnick’s findings regarding how institutions use custom proxy voting advice, and deviate from it.

This Friday - SMU Energy, Environment, and Natural Resources Colloquium

I'm delighted to share that I'll be presenting this Friday at the SMU Energy, Environment, and Natural Resources Colloquium.  Anyone interested in attending can register here.  A description of the event is below.  I'm excited to be working on my third (one and two) article with SMU energy law Professor James W. Coleman. It's at the intersection of energy and financial regulation, and I look forward to sharing more about it with readers soon!  I'm particularly grateful to co-blogger Joan Heminway and the University of Tennessee Law School for hosting the Connecting the Threads CLE series, the forum in which we first shared our initial papers! 

Description

"The SMU Energy, Environment, and Natural Resources Colloquium is an annual program, in its second year, which focuses on the interdisciplinary connections between the fields of energy, environment, and natural resources (“EENR”). It promises to be a pivotal gathering for academics, students, practitioners, and other stakeholders in the fields of law, science, engineering, business, and the humanities. The conference will delve into crucial topics like environmental justice initiatives, natural resource management using law and markets, carbon management, and interdisciplinary solutions to environmental challenges, featuring a mix of talks, panel discussions, and followed by graduate student presentations."